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Internet Fraud: an Overview of Classifications, Government Actions, and Consumer Protection
Internet Fraud: An Overview of Classifications, Government Actions, and Consumer Protection
December 14, 2006
Internet Fraud:
An Overview of Classifications, Governmental Actions, and Consumer Protection
Internet fraud is an increasing threat to our technological society, which thrives on the advances and
benefits of the Internet and e-commerce. With the increased growth and dependence of the Internet,
creative individuals have found ways of conveying fraudulent schemes as legitimate goods and services.
Not only does Internet fraud cause harm to individuals and institutions, but it also damages the
consumer confidence of valid Internet businesses and e-commerce. There are many forms of Internet
fraud which Internet patrons need to be aware of and cognizant of. This paper will explore major
classifications of Internet fraud, provide information on how to deal with Internet fraud, relay actions
taken by the government to thwart Internet fraud and prosecution thereof, and also take a detailed look
into one type of Internet fraud especially, identity theft.
According to the Department of Justice (http://www.usdoj.gov/criminal/fraud/text/Internet.htm),
Internet fraud is any type of criminal scheme that uses one or more components of the Internet to
present fraudulent solicitations to prospective victims, to conduct fraudulent transactions or to transmit
the proceeds of fraud to financial institutions. Major types include; online action and retail scams,
business opportunities or work-at-home scams, investment schemes, phishing, and identity theft and
fraud. Seventy-five percent of fraudulent parties contact their victims via web-sites, while the remaining
twenty-five percent contact their victims via e-mail correspondence as reported by the National
Consumers League’s National Fraud Information Center/Internet Fraud Watch program, Internet Scam
Fraud Trends for January-December 2005 (http://wwww.fraud.org). In addition, thirty-seven percent of
Internet fraud complaints were made against parties residing outside the United States and Canada.
Among the United States, nine percent of complaints were made against parties in California, seven
percent against parties in New York, and six percent against parties in Florida. In terms of financial
losses, the total loss in 2005 was $13,863,003 which was significantly higher than the $5,787,170
reported losses in 2004. Average individual losses also increased from $895 in 2004 to $1,917 in 2005.
Overall, the number of scams reported rose by twelve percent from 2004 to 2005 for Internet fraud.
Internet Fraud Classifications
Fraudulent online auctions scams are those that typically offer high-end retail goods to customers via
online auction houses, yet deliver nothing or counterfeit items to the customer who purchased the item.
Most online auction sites specialize in person to person activity where individual sellers or small
businesses sell their items directly to consumers. In these auctions the seller, not the site, has the
merchandise and often the site will not take responsibility for any problems that may arise between
buyers and sellers. On the other hand, general merchandise retail scams occur when fraudulent parties
create fake websites, which look legitimate, and sell retail goods to customers but deliver nothing or
counterfeited items upon purchase. Online auction scams and general merchandise scams were among
the most frequently reported type of Internet fraud reported to the National Fraud Information Center
Internet Fraud Watch. They reported that in 2005, forty-two percent of all Internet fraud complaints

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(not including identity theft complaints) were against online auctions and/or goods which where never
delivered or misrepresented and another thirty percent of all Internet fraud complaints were against
general merchandise retail schemes not through online auctions.
Business opportunities or work-at-home schemes use e-mail and the Internet to sell and advertise profit
making business ventures for various amounts of money, sometime substantial, then fail to deliver the
training material or information necessary to make the business or work at home initiative a viable
business. Or the customer who has bought in to the venture might be sent a combination of computer-
related work such as word processing or data entry, envelope-stuffing or make-at-home crafts scams. All
of which require the consumer to spend more money on advertising, postage, printing, etc. The National
Fraud Information Center/Internet Fraud Watch program reported that in 2005 work-at-home plans
accounted for the scam with the most victims under the age of thirty.
Online investment schemes most commonly are called market manipulation schemes because of the
manipulation of security markets for personal profit which take place. Two types of market
manipulation schemes have taken precedence in recent years. “Pump and dump” schemes typically
distribute inaccurate and false information on the Internet via chat rooms and e-mail in order to
attempt to dramatically increase or “pump” stock prices of a small traded company or a shell company.
Then the fraudulent party will sell or “dump” their stock holdings when the price reaches a certain level
for a sizeable profit before the stock returns to the lower level, and prior to the public realization of the
false information. Similarly, “scalping” occurs when false information is used to considerably deflate the
price of a certain stock. Once the stock falls to a certain level, the fraudulent party will buy the stock
only to sell it off when the stock returns to its previous price. With these types of schemes, fraudulent
parties are able to reap huge profits is a short amount of time by correctly timing their stock selling and
purchasing according to Jonathan Rusch (2001) of the Special Council for Fraud Prevention, Fraud
Section of the Criminal Division of the Department of Justice as reported in the May 2001 issue of the
United States Attorney’s Bulletin.
Another type of Internet fraud on the increase is phishing. The Department of Justice defines phishing as
“a general term for criminals’ creation and use of e-mails and websites designed to look like e-mails
and websites of well known legitimate businesses, financial institutions, and government agencies in
order to deceive Internet users into disclosing their bank and financial account information or other
personal data such as usernames and passwords.” The fraudulent party then will take the personal
information obtained and use it for illegal purposes inclusive of identity theft and fraud. Individuals who
receive phishing e-mails typically do not realize that the sender may have used “spamming” or mass e-
mailing to send the same e-mail to thousands of other individuals. Many of those individuals who
receive the fake e-mail do not have accounts or customer relationships with the legitimate financial
institution, government agency or business which the e-mails allegedly came from and are able to
disregard the e-mail as a hoax. The fraudulent party or the creator of the phishing e-mail relies on the
possibility that most recipients of the e-mail will have an account or customer relationship with that
legitimate business and therefore trust that the e-mail is genuine, and trusting that divulging personal
information is the correct action. When personal information is obtained by a fraudulent party it can be
use to access existing accounts of the victims, allow the fraudulent party to withdraw money or buy
expensive goods or services, open new bank or credit-card accounts in the victims’ names, and then
allow the fraudulent party to use the new accounts to cash bad checks. In some recent cases, phishing

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Internet Fraud: an Overview of Classifications, Government Actions, and Consumer Protection Internet Fraud: An Overview of Classifications, Government Actions, and Consumer Protection December 14, 2006 Internet Fraud: An Overview of Classifications, Governmental Actions, and Consumer Protection Internet fraud is an increasing threat to our technological society, which thrives on the advances and benefits of the Internet and e-commerce. With the increased growth and dependence of the Internet, creative individuals have found ways of conveying fraudulent schemes as legitimate goods and services. Not only does Internet fraud cause harm to individuals and institutions, but it also damages the consumer confidence of valid Internet businesses and e-commerce. There are many forms of Internet fraud which Internet patrons need to be aware of and cognizant of. This paper will explore major classifications of Internet fraud, provide information on how to deal with Internet fraud, relay actions taken by the government to thwart Internet fraud and prosecution thereof, and also take a detailed look into one type of Internet fraud especially, identity theft. According to the Department of Justice (http://www.usdoj.gov/criminal/fraud/text/Internet.htm), Internet fraud is any type of criminal scheme that uses one or more components of the Internet to present fraudulent solicitations to prospective victims, to conduct fraudulent transactions or to transmit the proceeds of fraud to fina ...
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